Dollar Index Weakens as US Trade Tariffs Begin to Be Implemented

Market Overview

The US Dollar Index (DXY) has entered a second consecutive day of losses, driven by escalating trade tensions and direct interventionist rhetoric from President Donald Trump. With the new round of 25% tariffs on imports from Mexico and Canada taking effect from Wednesday, alongside a sharp increase in tariffs on Chinese goods to 20%, global trade uncertainty has surged. These policies are part of Trump’s broader strategy to counter what he calls deliberate currency manipulation by major trading partners, including China and Japan. Trump has consistently framed weaker currencies abroad as unfairly disadvantaging American exporters, and his administration is now actively employing tariffs and direct currency pressure to tilt the balance in favour of US manufacturers.

Moreover, the president’s repeated public calls for the Federal Reserve to cut interest rates have added another layer of downward pressure on the dollar. Trump’s desire for a more competitive US currency in global trade is aligned with his broader nationalist economic agenda, which seeks to repatriate manufacturing activity and support domestic producers. However, the Federal Reserve has so far maintained a cautious stance, highlighting the risks of persistent inflationary pressures stemming from supply chain disruptions caused by these tariffs.

This combination of trade policy uncertainty, political intervention in currency markets, and rising concerns over global economic fragmentation has created a bearish tone around the dollar, especially as investors begin to reposition ahead of key US labour market data and speeches from Federal Reserve officials later this week.

Technical Analysis

On the daily chart, the US Dollar Index is now exhibiting a clear transition into a short-term bearish trend, with price action forming a consistent sequence of lower highs and lower lows over the past several sessions. The price has also fallen decisively below both the 50-day and 100-day moving averages, further reinforcing the shift in momentum towards the downside.

Sellers are currently testing the 106.010 support level, which marks the lowest point in nearly two months. A confirmed break below this key level would significantly enhance bearish momentum, opening the path for a deeper correction towards the next technical support zones at 105.586 and 104.948, both of which align with previous swing lows and Fibonacci retracement targets from the broader bullish cycle that unfolded late last year.

Momentum indicators support this bearish outlook. The Relative Strength Index (RSI) has drifted into the lower 40s, signalling that bearish momentum is building, though conditions are not yet oversold. Meanwhile, the MACD histogram has slipped further into negative territory, with the signal line crossing below the zero axis, providing a clear technical confirmation of the developing downtrend.

Should sellers exhaust momentum near the 106.010 level, the resulting pullback could target initial resistance at 106.606, where the descending 20-day moving average converges with a minor swing high formed last week. Beyond this, a recovery above 107.570 would be required to invalidate the bearish scenario and signal a return to broader range-bound consolidation.

Key Technical Levels

• Resistance 1: 106.606
• Resistance 2: 107.570
• Support 1: 106.010
• Support 2: 105.586
• Support 3: 104.948
• Support 4: 104.450
• Support 5: 103.388

Fundamental Drivers

From a fundamental perspective, the US Dollar’s trajectory remains heavily influenced by the evolving trade war dynamics and the broader recalibration of global supply chains. Trump’s rhetoric, combined with the actual implementation of tariffs, has heightened uncertainty across global trade flows, particularly for North American and Asia-Pacific economies.

The latest round of tariff increases targeting Mexico, Canada, and China underscores Trump’s commitment to using trade barriers as a primary economic lever, not only to protect domestic industries but also to force trading partners into currency policy concessions. The White House has openly accused China and Japan of deliberate devaluation strategies, which Trump argues make US exports uncompetitive.

This politicisation of currency policy has placed the Federal Reserve in an increasingly difficult position. While economic data points to resilient employment and moderate growth, the Fed now faces intensifying pressure from both the administration and segments of the market to consider rate cuts if the trade conflict further constrains growth or contributes to unwanted dollar strength.

Later this week, Federal Reserve Governor John Williams is due to speak, offering a potential insight into how the central bank views these mounting external risks. Meanwhile, the US labour market data, particularly initial and continuing jobless claims, will provide the next key pulse check on domestic economic resilience. Should signs emerge of labour market softening, expectations for a more dovish Fed could intensify, adding further downward pressure to the dollar.

Conclusion

The US Dollar Index faces an increasingly fragile outlook as political intervention, trade frictions, and shifting Federal Reserve expectations combine to erode bullish momentum. Short-term pressure targets support at 106.010, with deeper retracements likely if sellers breach this level.

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